LA PAROLA AGLI EMITTENTI
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14 Dicembre 2007
Credit Squeeze Redux
parla
Haydn Davies
Chief Economist di
Barclays Global Investors
Market background
– Conditions are going to get worse in the US before they get better, but US markets appear to be pricing in too much gloom and too much policy easing
– European policymakers face accelerating inflation even as activity cools
– Activity in Japan remains downbeat but the weaker yen is finally giving a boost to Japanese exporters
– Despite mounting evidence that the UK housing downturn is picking up pace, the Bank of England will want to wait for concrete evidence that activity is weakening and inflation is under control
Lifted by policymakers’ enduring confidence, global stock and credit markets staged a remarkable recovery from the summer’s meltdown. The benchmark S&P 500 Index of the US’ biggest companies even ricocheted to a new lifetime high in October and order began to return to the capital markets. But investors hoping that all the bad news had surfaced in the third quarter have had a rude awakening, with banks issuing another round of profit warnings. The losses announced by US and some European banks on their portfolios of sub-prime mortgages have already reached
$60 billion and the market has begun to realise that there could be more bad news to come. The Organisation for Economic Co-operation and Development estimates the eventual losses on sub-prime mortgage related collateralised debt obligations (CDOs) could exceed $300 billion.
Even the most secure tiers of the complex CDO instruments into which individual mortgages were packaged have begun to look more vulnerable. The ABX index of AAA-rated mortgage backed securities indicates that investors are willing to pay only around two-thirds’ of their face value; a month ago they would have paid 95% of their value. This plunge in the value of the top-rated mortgage portfolios is a concern for the banks because it is these tranches that they have often kept hold of, while selling the less secure. Fears over more banking losses have once again drained liquidity in the money markets. This is reflected in the spread between US government backed three-month Treasury bills and more risky three-month euro dollar bills – normally less than 0.5%, has once again soared to 2.0%, the level it reached in August. …
